Sunday, September 7, 2008

What will the bailouts do for the stock market?

The Fannie & Freddie bailouts will help with sentiment in the short run, much like the Bear Stearns bailout, as we will likely see a general rally in equities on Monday and for a few days after that. This short term correction (rally) against the long term trend may take some of the indices such as the Dow back to their long term dominant trend lines.

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One of the key elements or values (among a total of 23) that make up the mental framework through which I view the financial markets is the following:

"Maximize the utilization of inefficiencies created by governmental institutions"

To be truly successful, one must view himself as a global citizen and approach the financial markets like a "Mercenary Guerilla." This means we exploit the effects that flawed institutions have on financial markets.

Will there be more financial bubbles? of course.... and the bubbles of the future will likely be even larger. Moral hazard increases with each bailout, encouraging more malinvestment when the next bubble begins to grow.

As we know, Governments' in general are inherently inefficient, wasteful, and coercive institutions. They create the boom bust economic cycles that have plagued our global financial system, especially since the early 1970's (no coincidence that was when what was left of the gold standard was completely abandoned).

Unfortunately these kinds of things are the norm in the flawed political/economic framework that we must operate within....

So what is in store for equities for the rest of the year and how do you profit from it? In my view the best way to play any market is to establish positions with the major dominant trend and against the minor trend. A rally from here would be a minor trend reaction that could take the dow back to roughly 12,000. I would look for any rally from here to fizzle out around that mark where the dominant bear trend would then reassert itself. Daytraders can of course exploit short term moves by having a bias in favor of the short term trend while still being vigilant that the dominant long term trend will soon reassert itself, and optimizing money management in light of how far prices move during a given time period.

Eventually reinflation of the economy and financial markets will occur, but not before 10,000 is tested on the Dow and the credit crisis has run its course (which is roughly 1/2 of the way through in my opinion). -John Bardacino